Goldman Sachs: Too Big To Obey The Law

On a short-term tactical basis, Goldman Sachs clearly has little to fear. It has relatively deep pockets and will fight the securities “Fab” allegations tooth and nail; resolving that case, through all the appeals stages, will take many years. Friday’s announcement had a significant negative impact on the market perception of Goldman’s franchise value – partly because what they are accused of doing to unsuspecting customers is so disgusting. But, as a Bank of America analyst (Guy Mozkowski) points out this morning, the dollar amount of this specific allegation is small relative to Goldman’s overall business and – frankly – Goldman’s market position is so strong that most customers feel a lack of plausible alternatives.

The main action, obviously, is in the potential widening of the investigation (good articles in the WSJ today, but behind their paywall). This is likely to include more Goldman deals as well as other major banks, most of which are generally presumed to have engaged in at least roughly parallel activities – although the precise degree of nondisclosure for adverse material information presumably varied. Two congressmen have reasonably already drawn the link to the AIG bailout (how much of that was made necessary by fundamentally fraudulent transactions?), Gordon Brown is piling on (a regulatory sheep trying to squeeze into wolf’s clothing for election day on May 6), and the German government would dearly love to blame the governance problems in its own banks (e.g., IKB) on someone else.

But as the White House surveys the battlefield this morning and considers how best to press home the advantage, one major fact dominates. Any pursuit of Goldman and others through our legal system increases uncertainty and could even cause a political run on the bank – through politicians and class action lawsuits piling on.

And, as no doubt Jamie Dimon (the articulate and very well connected head of JP Morgan Chase) already told Treasury Secretary Tim Geithner over the weekend, if we “demonize” our big banks in this fashion, it will undermine our economic recovery and could weaken financial stability around the world.

Dimon’s points are valid, given our financial structure – this is exactly what makes him so very dangerous. Our biggest banks, in effect, have become too big to be held accountable before the law.

On a more positive note, the administration continues to wake from its deep slumber on banking matters, at least at some level. As Michael Barr said recently to the New York Times,

“The intensity, ferocity and the ugliness of the lobbying in the financial sector — it’s gotten worse. It’s more intense.”

But at the very top of the White House there is still a remaining illusion – or there was in the middle of last week – that big banks are not overly powerful politically. “Savvy businessmen” is President Obama’s most unfortunate recent phrase – he was talking about Dimon and Lloyd Blankfein (head of Goldman). After all, some reason, auto dealers are at least as powerful as auto makers – so if we break up our largest banks, the resulting financial lobby could be even stronger.

And we can only hold firms accountable, in both political and legal terms, if they are not too big.

It is much harder to sue a big bank and win; ask your favorite lawyer about this. Big banks can more easily hold onto their customers despite so obviously treating them as cannon fodder (take this up with the people who manage your retirement funds). Big banks spend crazy amounts on political lobbying – even right after being saved by the government (chapter and verse on this in 13 Bankers.)

When you really do want to take on megabanks through the courts – and have found the right legal theory and compelling lines of enquiry – they will threaten to collapse or just contract credit.

No auto dealer has this power. No Savings and Loan could ultimately stand against the force of law – roughly 2,000 S&Ls went out of business and around 1,000 people ended up in jail after the rampant financial fraud of the 1980s.

We should not exaggerate the extent to which we really have equality before the law in the United States. Still, the behavior and de facto immunity of the biggest banks is out of control.

These huge banks will behave better only when and if their executives face credible criminal penalties. This simply cannot happen while these banks are anywhere near their current size.

Fortunately there is precisely zero evidence that we need banks anywhere near their current size – we document this at length in 13 Bankers (in fact, this was a major motivation for writing the book).

“Two congressmen have reasonably already drawn the link to the AIG bailout (how much of that was made necessary by fundamentally fraudulent transactions?”

Wrong question, the right question is: How much AIG bailout was made necessary by the fact that AIG was able to market their (later unwarranted) AAAs because these ratings were instilled with so much value by the regulators?

NO ONE who is a serious player on Wall Street is legitimately surprised by this, and probably no one in regulatory bodies are either, unless they are just showing up to collect a paycheck and obtain free Internet access.

The antics of Goldman Sachs have been getting by on a ‘wink and a nod’ from the regulators and the market for some time. Why? Because they are powerful, and because like Lehman and their off balance sheet frauds, they are almost ALL doing it on Wall Street as part of the franchise. Goldman has just been a pig about it, and probably burned some insiders and powerful investors in their fraudulent Abacus trade.

Break the Banks up, and put them to the traditional task of allocating capital to commercial markets. If the US will not reform the financial system, ban them from any banking activities in your region.

Change the dollar reserve currency system which is firmly in the hands of the Wall Street money center banks, their friends at the Treasury and in the Congress, and their employees at the Fed. Don’t just regulate them. Break them up. And audit the Fed. Do it now while you still can.

Must there be a book plug in every post? We like you, we like reading what you write, we’re buying the book, you’re getting the money. After a while a plug in every post is just cheesy.

As Mr. Chuck Palahniuk one wrote, “the American dream is to turn your life into something you can sell.” Isn’t that the real problem? In any case, you’re done, take a rest already.

If Goldman Sachs has a ‘franchise value’ it’s based on the firm’s ability to beat other players at a zero sum game and otherwise extract money from the goods & (non-financial) services economy. Not on all the great money-making opportunities they set before their ‘customers’, not on their honesty or integrity. ‘Unsuspecting customers’? Every ‘customer’ of Goldman and the other sell-side banks understands they’re dealing with an adversaries and competitors, not anyone who’s there to help them. And those customers are mostly just other intermediaries anyway, with their own money-extraction businesses for which Goldman et al help build the sets. The customers fully suspect and they don’t care – why would they? A fraud claim is just a chance to shift accountability. Which, more than anything – more than money – is what drives the buyside. It is disgusting, it should change, but no one involved is ‘unsuspecting’ of any of it. Everybody. Knows (knew). Everything.

The SEC claim is weak, in my opinion. There are serious materiality, reliance and loss causation issues. It almost seems designed to present a colorful example of particularly sleazy and inflamatory behavior and prove in court why it was legal. I don’t think the SEC needs a lawsuit to fish for information, they’ve been rooting around in Fabulous Fab’s emails for a while looking for good ones. And if they were going to sue ACA or Paulson they would have done it.

. . . if we “demonize” our big banks in this fashion, it will undermine our economic recovery and could weaken financial stability around the world.

I was reminded of a family where the father, the provider, rapes and abuses his children. It works in both cases: If you demonize the provider, the family looses its economic stability would make a good argument here, also

But we’ve demonized government for 30 years, haven’t we? “Government is the problem,” Reagan said, and it became the mantra for making money. As a result, public trust in government is at an all-time low:

Nearly 8 in 10 Americans say they don’t trust the federal government and have little faith it can solve America’s ills, the survey found.

Yet for economic stability, big banks and government are two sides of the same coin. Banking requires the rule of law to function, and the rule of law flows from the people through government.

Thats a good question, another is if they are still taking free money from the Fed as a ‘bank holding companies’ which has access to the Fed window (as is the case of JPM which is currently getting a negative interest rate…yes you read that right…on loans from the fed. IOW, JPM is getting paid to take out loans.

Goldman is a group of hedge funds. You can open an account with Goldman but the MINIMUM account balance is $10Million. Nice club.

What interests me regarding the Abacus trade after reviewing some documents is the AC-1 and another titled AC-1 in the Caymens but with a different sub account. Perhaps this was just the holding account for Paulson/Goldman or Paulson/ACA. Equally of interest is the connection of AIG/Goldman and payouts. Since we the taxpayer are majority shareholders of AIG, I would like a detailed explanation of how those securities were paid at 100% to Goldman.

JPM has seen zero in accounting for testimonies of bribery by them of officials in the Alabama for selling bonds related to the sewage deal. There is PLENTY for the DOJ to investigate as well as state AGs. The question remains why even more egregious activities by broker/dealer/bankers haven’t yet to see one serious investigation which opens the books and follows the money.

Fraud is to be stopped wherever it appears. Tiny brokers are quickly stopped from fraud, big well connected with politician firms should be stopped by regulators from fraud too. Size of banks (commercial or investment banks) can be stopped from fraud with purposful regulators. No regulator investigating fraud at a bank can be stopped by being hired by the bank. That is the pressure point. Goldman should not be immune from thorough investigation and prosecution if they are believed guilty of fraud or malfeasance. Governments must be held accountable for their roles in design flaws leading to ultimate fraud being perpetrated.

Yes, limiting their size at a benchmark, such as the $100 billion you’ve suggested, is certainly one way to limit their power. But the other half of the equation must address their raw ability to create systemic damage.

Because, given enough leverage and reckless employees, a small podunk bank in the middle of a Nebraska cornfield can bring down the global economy.

That’s why any legislation to limit size without limiting leverage to low single digits would be worthless in terms of warding off potential future meltdowns.

To follow up on the stories from last night, the Financial Times reported in January: SEC subpoenas big banks over CDOs

“The Securities and Exchange Commission sent subpoenas [in December 2009] to banks including Goldman Sachs, Credit Suisse, Citigroup, Bank of America/Merrill Lynch, Deutsche Bank, UBS, Morgan Stanley and Barclays Capital, these people said. Requests for information were also made by the Financial Industry Regulatory Authority, which oversees broker-dealers.”

I have to say that this post is not much of a road map given your agreement with Dimon’s point given the lay of the land now. So sue gently? Settle for a nominal sum? Would firing/resignation/claw backs suffice for “senior” leadership?

As a political matter, Banks need to be smaller regardless of whether such a bank poses a threat to the system systemically (with Krugman suggesting the evidence is weak that size was what mattered). We need oligopoly/plutocracy busting in and of itself because a Democracy will not thrive (survive?) in competition with entities this powerful as pointed out ad nauseum in non-MSM.

An update on that: the Dutch RABO bank has an ongoing
lawsuit against Merill Lynch in relation to the ‘other’
failed “Norma” synthetic CDO assembled by the other hedge-fund Magnetar and has made contact with the S.E.C on the matter

I disagree with your point.
While I absolutely hate being hit over the head with sales pitches I find the way Mr. Johnson mentioned 13 Bankers in this post was simply as a pointer to more information (in the first case) and to accentuate his point in the 2nd.

I find Mr. Johnson’s voice to be very, very important and repetition will be of more value than harm.

Why do people assume the breakup of big banks would need to be on functional lines?
What’s wrong with saying that no single (financial) corporation, or family of corporations under common control, can have capital of greater than $x billion, and any returns that would put the balance sheet above that number are required to be dividended to shareholders?

I don’t think there is a meaningful difference in litigating against a bank with $900 billion in assets as compaired to one with only $500 billion (or $200 billion for that matter). No matter what the cap is, the bank is going to have deep pockets from which it can defend enterprise-threatening litigation.

Secon, as to Paulson, after reading Michael Lewis’s book, and Yves Smith’s critique of it in the Huffington Post, isn’t this story implicit in a synthetic CDO? That is, if your CDO is made up of CDSs on RMBS CDOs (rather than on the CDOs themselves) how does an investor not know that someone is betting on the reference securities’ failure? Definition the investor did know that, but for some reason believed that the bettor was wrong (most likely because the rating agency told them so).

I strongly agree SJ’s is an important voice (even if it is overstating the significance of SEC vs Goldman imho). That’s why I would buy his book even if he didn’t provide the convenient link to amazon in every post. It happens too much for me to believe it’s anything but marketing. Enough of which I think is fine and has been accomplished.

I view this as another nail in the coffin of a Modern Society. A fall in a society bent on invitation from the power of evil it’s self, (If you believe in a Heaven or a Hell) and bringing a whole world to a new meaning and view of an old Theorem of Coase (Oppression).

I am writing my thesis on this theorem, and through development and research of the mathematical formulated layers. Layers of contraction and expansion of debt to true sustainable growth in our one world is showing a crash course with that of deep “Oppression”.

Further research still keeps on the radar; the groups of the foundations of orders that would have our world converge towards a metrics; as pushed by the likes of the Builderberg Group and the likes of the Tri-lateral Commission folks.

These folks could be the ones being the real folks orchestrating the Goldman’s, our politicians, and a host of other conditions far greater the conceptually can be written within this little quip post. The problems for all to wake up quick to as the sirens are fully blaring as the air raids of the Wars you have seen. Sometimes, going back to school to get your degrees opens doors to knowledge you want to quickly close and move to a remote island where all can just get along.

Unthinkably, this is the War for the very nature of your financial soul of what you cherish within your life as important. The more you take on personally as debt the more you will find the oppression theorem coming to life. This is a critical message for countries and that of states and local governments and corporations.

The days of being off the Gold standard since the Presidency of Richard Nixon have ended. We need to re-introduce this Gold standard and make this then the steady piece for all nations to set their growth pace upon a solid foundation of debt management and not that of inflated printing presses.

We can continue down the road invited by the very nature of the evil one himself, or stop the others pushing the opposing availability for all to be invited to the table of debt and oppression in the imprisonment of Countries no longer able to maintain sovereign levels become then the servants to the other and so on.

These are on-going thoughts from a far-fetched string of concentrations to center responses to get all to respond to change the systems that would cause the ruin of so many.

“But as the White House surveys the battlefield this morning and considers how best to press home the advantage…”

To come to the aid of their donors? To limit the impact of inconvenient prosecution on financial reform? To use this as a cover to push through a flawed, fraudulent financial reform designed to neutralize the “opportunity risk”?

IF we had let them “fail” in an orderly fashion as we were legally required to do according to the “PROMPT CORRECTIVE ACTION” mandate coming out of the S+L crisis, we simply would not have this problem now. WE currently have, and have had the authority to put these banks into receivorship, and wind them down. While in receivorship, we could have decided who to pay, how much, when, where, why, and how. But, we wouldn’t be waking up April 19, 2010 with the likes of Goldman Sachs and Llyod Blankfein.

That we didn’t follow the law and its mandates under either the Bush OR Obama administrations tells you where this legal action and reform effort is going-nowhere. Smoke and mirrors to placate the restless proletariat.

I was telling my husband yesterday, after watching the sunday shows and being thoroughly disappointed with their treatment of this topic, that i would like to hear someone debate whether or not we have any economy if we send the bankers to the jail they belong in. And then this morning here is the exact topic i thought i would never see anywhere. Thanks :).

At the end of the day politicians act for political gain. Right now, the fear in Washington is that anti-bank rhetoric is good for their political fortunes, but anti-bank ACTION (with the risk, however small or over-blown, of damage to the economy) is too risky with November looming.
People vote their wallet. No matter how indignant the public may be about Wall Street, they will not tolerate any hit to their bank account to do anything about it. Dems need economic roses in November, desperately. If going after WS rocks the economic boat, they won’t touch them.

Nothing would be a greater relief for a great many number of people but to see Wall Street hit their China Syndrome moment.. Certainly the millions of unemployed Americans would like to see these immoral financial raiders demolished. It is time that the risk of financial collapse be shown to be real…if the Governements of the World are unwilling or incapable of executing meaningful reform than the “laws” of nature will surely take of it for them.

Much chaos will ensue.. Maybe many people will die.. People scoff at statements like this but what was World War 2 other than a perfect storm of political economic madness? Where is it written that the United States will last 1000 years? Look at the mayhem being caused after 5 days of closed skies in Europe. The airlines are basically saying that it is worth risking a preventable plane crash to keep the economy humming… And they might be right.. Who are we to know which economic butterfly is flapping its wings at this very moment that may lead to unforseable circumstances down the road that would justify the ceremonial sacrifice of a few hundred people in the name of global commerce?

People in power seriously need to get their heads out of their asses.

The thinking about these matters is unbelieveably small and inimaginative.

The Goldman Sachs story reminded me of Ivan Boesky.
Before Boesky was shown to be a cheat, there were lots of fawning articles about him and how brilliant he was, just like there have been for years about Goldman Sachs. Then it turned out that Boesky had been committing fraud; no one thought he was brilliant anymore; and he went off to jail. (Of course, it was 3 years; not like the 10 to 20 we would give a teenager selling crack on a street corner). But Boesky was just stealing money from other investors. Paulson and Goldman’s fraud depended on throwing poor people out of their homes. There’s a big difference.
Paulson is a big campaign donor, hedging (as one would expect of a hedge manager) by giving money to both sides. http://www.opensecrets.org/news/2010/04/hedge-fund-manager-in-goldman-sachs.html. How long will it be before there is a self-righteous purging of those donations? Senator Levin? Harry Reid? Senator Durbin? If Paulson skates on this, it will be pretty good evidence of the fact that $4,600 buys a lot of protection.
We all should be watching.

Isn’t it reasonable to suppose that if lawsuits do unearth one thing leading to another, or one plea-bargaining defendant leading to another, that eventually the TBTF monster banks will do what a reasonable organism does when under attack, and break off the offending part, like an octopus with a wounded arm? And pretty soon there are eight octopi and a dying center. The government wouldn’t have done the break-up. The bank would do its own breaking up, pulling away from one offending extremity after another, until it achieves its own dissolution?

The financial scandal and the sex scandal in the Catholic church have hauntingly similar characteristics. In both cases were talking about large, long lived institutions whose leadership aided and abetted criminal activity for years. In both cases there is a reluctance on the part of governments to clean house through criminal processes, for fear of collateral damage. In both cases there is zero efforts from within other than those needed to calm the public.

In both situations we’ve arrived at a moment of crisis: a moment of real opportunity but no certain outcomes.

From my perspective, the course is clear in both cases: do the right thing by cleaning up the mess and purging each organization of much of its parasitic load of thoroughly corrupted executives. Work through the consequences with confidence that the unforseen can be dealt with.

Look at both of them as medical patients, mortally ill from parasites and AIDs which has weakened their immune systems, whose only hope is a modern medical system.
It’s past time to operate and extract the parasites, and provide strong medicine for the patients until they demonstrate complete recovery.

JD is actually making the case for significant reform, even if he doesn’t think so. The fact that doing this or that, by way of regulation or by way of SEC investigation or action may cause a renewed credit crisis, cause a double-dip, or whatever, seems highly probative of the fact that the status quo cannot be maintained. Kind of ironic, so to speak. Kay Bailey Hutchinson was so funny on CNBC this morning. Her solution to TBTF is to let the big banks and bankers know that they will not be bailed out if they fail. In other words she is willing to rely on their prudence. Mark Haines kept asking her how this would prevent banks from becoming TBTF and her answer was essentially “because it would.”

Tom Hartman had a good analogy this morning: The TBTFs are like terrorists that strap nuclear bombs to their bodies, and then threaten to blow up the system if we don’t give them what they want.

Except, I wonder where is their push button to detonate. Without one, they are not in control. In such a circumstance in dealing with a terrorist, one might choose to shoot them in their extremities to cause as much pain as possible before waltzing over to disarm the bomb. In this case, taking control of the weapon away from them and using the appropriate experts to defuse it would be more humane. Someone above said nationalize them. If that is the best way to do the above, go for it. But if the process of prosecuting the frauds has the time lines expressed earlier, it would seem the heat necessary to set off the bombs won’t be triggered. So the government can just proceed with the prosecutions, the capping of bank sizes to reduce the size of the bombs and the advantages provided the terrorists by their perceived government protection, the creation of regulations to bring transparency to, and simplification of financial instruments.

I’m sure there are some intelligent jd’s that read this post that could probably offer insights.

How is this case different than the first corporation that produced toxic waste and looked for a place to dispose of this waste? The corporation went from county to county speaking with local officials to see if they will allow the waste to be dumped. The officials did not fully understand the waste but agreed to disposal in exchange for nice payments. A few years later the citizens of the community start to die off. The corporation knew the waste was toxic but did not disclose. Unfortunately, there was not a law in place that dealt with the handling of toxic waste but there were obvious negative consequences. Since the corporation knew the negative consequences and acted and did not disclose the full ramifications of the contract, isn’t the corporation subject to compensating the victims of the toxic waste? How is this different then what Paulson did?

it’s not either or…the banks are way too big and not trustworthy enough…it does not benefit the average consumer or the average business or the U.S. government to have these banks bigger than the U.S. Treasury (well, almost)…it’s all about power and influence for these bankers (banksters?)… the power to do whatever and whenever they please and thumb their noses at the politicians, regulators (or the entire government) or the American people who elected them…these unwieldy megabanks can do more damage to the entire U.S. economy (and the entire U.S. population) with some stupid or fraudulent deals (CDO’s; derivatives, sub-prime mortgages, etc.) than any drug cartel bringing in cocaine/heroin accross the Mexican border…yet we have a War on Drugs which is costing us Billions and yet we do not have a War of Crooked Bankers…why not?…maybe because drug cartels do not hire savvy K Street lobbyists… while Wall Street funnels millions thru campaign contributions to both parties…

What Paulson helped to produce and traded was synthetic virtual waste… the real toxic waste was produced by those mining truly bad mortgages and then having these enriched by the credit rating agencies and transformed into real AAA-bombs… go after them!

Brad – you are overlooking something: the financial mess is a symptom of a political crisis.

Megabanks might be just what we need to run an economy, BUT the amount of political power they wield BECAUSE they are so big is the root cause of the economic problem. The only way to get rid of the POLITICAL problem (and at the same time address the cause of the economic mess) is to break up the banking cartel – including the Federal Reserve System.

I saw you guys on Bill Moyers. I do intend on buying the book. Seems like a good read.

By nature I’m a fairly optimistic guy. With that said, I’ve got a sizeable six figure bank account sitting on the sidelines because I’m still hiding under the proverbial bed waiting for the next shoe to fall.

Naturally I was spooked when the market crashed. What honestly scares me more is the run up to 11k on nothing more than speculation of better days to come.

NOTHING has been done to correct the problems that caused the crash in the first place. NOTHING has changed the business practices of these banks with the exception now they’re gambling with taxpayer funds. I’m surprised that more people arent looking at the rating agencies that perpetuated the crash with false data.

As dimwitted as they appear, it seems a certain segment of society known as the Tea Party movement has got the right recipe for being heard. I’m not advocating dressing up in patriotic costume but why aren’t the intellectuals coy/clever enough to pull off a similar task to publicly peddle their agenda??? Grandma dressed up like the Statute of Liberty, et al., with her “drill baby drill” homemade sign, certainly crossed Obama’s radar, enough so to make him flip-flop on drilling for oil off the coast of the U.S. Understandably the media covers events like that for the freakshow element. Somehow there must be a better high tech way of getting the opposing message across.

Re: @ Barbaralogician….Yes,indeed…why promote your grandiose work of ethics,and consciousness on every post? Perhaps you like living in the dark ages,but I would scream at the top of the mountain throughout this blog as a virtuoso too awaken the illiterate or better said…uninformed to bear-witness to the rape of america! Shame!

I think regulation is probably the least important (but still important) factor in changing the financial system. Most important is creating greater transparency in all finance activities so volumes and risks are better understood. Secondly, I agree with Simon that banks must be limited by size. Given enough time, banks will always find loopholes and ways around regulation so the only true way to get rid of the TBTF or TBTL problem is to limit their size.

Re: @ Bill…..Krugman,and his colleagues think inside the box – think of it as a improv closed group think cubical where all reason is recycled gibberish. Now,…Mr Joeseph Stiglitz is a man that marches too his own beat, he has been beating the drum of malfeasance,and fraud needing reform for a decade,only to fall upon deaf ears. A true thought provoking pioneer that is willing too risk/sacrifice his reputation for the people,and the good of the country. JMHO

Important factor that is being overlooked by nearly everyone, including the authors: A. Goldman Sachs lost something like 90 million on this exact same hedge fund. SEC will have a very hard time in court because Deautsch (spelling) and others professed to the number one experts in mortgage backed securities and CDO’s were betting long-term with these exact same funds. Paulson went in to GS and basically said can we create something I can bet on in the short-term. And they did. And Goldman Sachs themselves lost money on this exact pool. So I don’t really understand how everyone gets off the GS did something horribly fraudulent. Let’s keep in mind Paulson was just an average hedge fun guy at the time, so it’s not like he had some overwhelming influence

Re: @ Hillbilly Darrell……None of this is President Obama’s fault,period! This belongs to the past,starting with the Republican’s main man, honest “Tricky Dick” Nixon (trust me,I’m no liar?),and has gained steam since…with every incumbent president gaming the political system (Yes ,I did say that,..?). In all fairness to President Obama, who knows how the health-care bill will work out,…but I’m willing to give him a break. Now,…let’s focus on the present. If he is really sincere at going after these big banks (Wall Street) – he’s a one term president, for “AIPAC” will hand him his nomination on a seared platter mired in dung!

Simply reducing the size of “Wall Street Banks” won’t prevent another 2008-like economic meltdown. The following economically explosive problem will need to be eliminated as well. This explains the REAL REASON why so many “Wall Street Banks” became technically bankrupt within a few days after Lehman Brothers went bankrupt. That was NOT a coincidence!

Wall Street’s “Credit Default Swap” SCAM!

This is my take on Wall Street’s near financial collapse in the fall of 2008, based on the situations and points revealed in Simon Johnson and James Kwak’s book “13 Bankers—The Wall Street Takeover and The Next Financial Meltdown.”

PROBLEM: Wall Street firms liked to pedal Credit Default Swaps as if they were ”insurance policies” to “hedge investors’ bets” against any potential default on a loan, bond, or in some cases other “financial instruments” created by Wall Street firms. But unlike insurance companies which were required by law to maintain adequate “statutory reserves” to ensure that they will have adequate cash on hand to pay up when the insured liability materializes, the issuers of Credit Default Swaps rarely (if ever) maintained such reserves. They got away with this, because Credit Default Swaps are considered to be “derivatives” that are created, sold, and traded in Wall Street’s unregulated “shadow banking” markets. Being “backed up” only by their issuer’s reputation, I believe it would be more accurate to call them “unfunded liability swaps” or “insurance scam swaps.” Nevertheless, they were very popular, because even if the Credit Default Swap creators kept the large commissions/fees that they received in a “statutory reserve” of some kind, those reserves would probably not have been sufficient to cover the corresponding default risks, so the purchasers of Credit Default Swaps thought they were getting a “really good deal” for their money.

IMPACT: The fact that Credit Default Swaps are inherently fraudulent in nature is bad enough, but the destructive role that they play gets even worse. By using Credit Default Swaps to create elaborate interlocking financial dependencies among themselves (and by using their alleged “hedge your bet” capabilities to create an illusion that they are far more “financially solvent” than they really are), large Wall Street firms have created a situation whereby the bankruptcy of even just one of them will create a chain reaction of “pay up” requirements that will bankrupt ALL of them (unless our government quickly “bails them out”)! This is what happened when Lehman Brothers went bankrupt, because the US Treasury Secretary couldn’t find any other firms who were willing to “buy them up” (unlike the case with Bear Sterns). The resulting chain reaction of “pay up” requirements created primarily by the interlocking (and crumbling) “house of scam-cards foundation” of Credit Default Swaps quickly brought the rest of the “Big Banks” to a point where they were technically bankrupt as well. But rather than declare bankruptcy, their CEOs essentially decided to simply stop trading altogether and wait for our government (and US taxpayers) to bail them out. And as Paul Harvey used to say, “The rest is history.” The impact of Wall Street’s Credit Default Swap Scam on America’s economy (and the economies of many other nations) has been PAINFUL, to say the least.

RECOMMENDED SOLUTION: So because they are essentially fraudulent in nature, and because they have been playing such a key role in making “Wall Street Banks” seem to be “too big to fail”, Congress should OUTLAW ALL CREDIT DEFAULT SWAPS, but give those Wall Street firms about a year to “unwind” their interlocking “house of scam-cards foundation” in a way that will enable them to remain solvent and functional.

I think it has been common knowledge that Goldman was untrustworthy for at least the past five years. People kept dancing until the music stopped because they felt immune, not because they did not think the disease was present. There is greater appreciation for our individual vulnerability with each passing day – partially because of the purging effect of bloodbaths – but also due to legal actions that bring to light the trauma inflicted on others.

I think Simon though has it right (as always). People are still dancing with Goldman, because there are no alternatives. They are too big to be held accountable.

It is the politics which have changed everything (thankyou democracy). The democrats are going to lose in November largely because the bailouts are being (unfairly) pinned on them. Their ONLY defense is to turn wall street into the bad guys. That ship took too long to turn, and is unlikely to turn back. We can count on the arrogance of Dimon and Blankfein to influence Summers and Geithner. But Pelosi’s interests run counter. There are 7 months to November. The PR is going to get hotter.

What is also missing in this discussion is what happens when you have a real depression When lots of people have no food no jobs and no hope Do you think they will stick with the status quo or consider other forms of government?

Sorry, you think there is a shortage of lawyers interested in bringing class action suits? If there is one thing everyone should acknowledge with certainity, it is that any company that gets bad press will be sued in a class action by someone.

Bob Goodwin – I don’t think the dems will lose too many seats in the house. The republicans are successfully branding themselves not only as the “party of no”, but also the party of CRAZY. As long as Sarah Palin and Ron Paul are receiving press as being front runners for the party’s hearts and minds, the party is going to alienate themselves from independent swing voters who will be scared off by those douchebags. Also, around November all economic indicator should be in better shape that they are now. It doesn’t look like it will be as bad as the Newty bloodbath back in ’94.

I have yet to buy Simons book, because I have bought (but not finished reading) Rogoff and Yves Smith. I really need to find the time to get to Simons book as well. Keep on poking me… This is the most important event of this decade, and Simon is a national treasure.

CJ H ‘And Goldman Sachs themselves lost money on this exact pool. So I don’t really understand how everyone gets off the GS did something horribly fraudulent.’

This seems to encapsulate the problem thinking. Fraudulent action surely does not become OK if one loses money on the transaction.

If we attempted to defraud a bank and actually lost money, we would still rightly be adjudged guilty and end up in the slammer.

Maybe a helpful item would be to establish an agreed ’10 commandments’ for banking? Is this possible? I recall a statement in an old book, ‘the adulteress eats and wipes her mouth and says, I have done no wrong.

All this seems a morass of convenient virtual morality. Perpetrators will always argue they have done no wrong! It seems such arguments pivot on personal gain, hardly a valid base for rational guidance?

GS’s purported long position is irrelevant to the claim under § 17(a)(2) and (3) of the Securities Act. All that matters as far as their conduct is concerned was did they omit or misstate material facts. That claim against them is very narrowly drawn. All the disgust over the nature of the transaction is just that.

The issue is not size, it is a government that is so deeply involved in the private sector that it is a business necessity to buy political influence. Do you really think that a panic involving 1000 little banks is any less of a catastrophe than what we have just been through? The difference between 1000 little banks and 5 big ones is that the little banks hire professionals to buy off politicians while the CEOs of the big banks do the dirty work themselves. Is it any more effective for Hank Paulson to hand out marching orders to the banks in a football stadium than it is in a “smoke-filled” room?

Size is not the issue. The issue is the restoration of the rule of law rather than the rule of regulators. Banks need a capital structure and a resolution process that allows them to compete and allows them to fail and puts them at an arms length from the politicians.

Will we ever get this from the Democrats? Squeezing campaign contributions out of Wall Street is far more lucrative. Will we ever get this out of the Republicans? Maybe.

Those who want to clean up the transgressions of the past are going to have a hard time, because the rules of the past are precisely what brought about the transgressions. Sorting all this out may simply be an empty exercise.

We would be better occupied working on the future. I intend to live in some of that. My children and grandchildren will live in a little more. Let’s correct things so they never see what we have seen.

I continue to ask whether anyone has any reasonable argument against Simon & James basic solution: break up super-huge entities into manageable (and understandable) parts? If there are real problems here, what are they? If not, why not try to do what they say?

Re: @ art….Mark Haines is the only reason I watch CNBC – he’s briliant,pragmatic,and impartial. Hutchinson is part of the problem. She would like to gloss over this flair-up like the rest,and wish it away. The “Great Depression” never ended until WWII ended,period! The same scenario is playing out as I write – the Central Bank…back then, and now had kept rates low (all the big banks during the crash had recouped all their losses ,and were literally swimming in dough as they are today)too feed the evil empire we call “Wall Street”, and as then as today (deja’vu all over again,..forget the past,you must again relive it)the Fed will eventually raise rates causing much pain. But,… is it necessary this time? Who says or dictates what inflation is…who? Remember this – back in the 30’s they started raising rates without cause,and we all know of the dire conseqences. Now,…let’s look at “Food and Energy” (this new phenomeum created out of? Basket of ,What?) being exempted from the inflation numbers(how convenient)? What’s left? Oh yea,…sixty hour work weeks for both parents, and a shanty (roof over your head) that is now worth 50% less today! Are you depressed yet? The best part is now – the rate hikes are coming folks,and the only change you’ll see is the change you have after cashing your pathetic paychecks at the Lord’s & Masters House of ill repute! Follow the money

I do have to agree with you Charles Williams (and Simon for that matter in “13 Bankers”) that 1000 very interconnected very risky small banks are almost as dangerous to the economy as six large institutions that comprise an oligopoly. That is were improved regulation and transparency come into play.

One of the main problems with the largeness of institutions, not withstanding the political power you mentioned, is the implicit government guarantee. This will always exist as long as the failure of one institution risk causing permanent damager to financial system. There needs to be legislation passed limiting the size of a financial institution to an amount that is deemed “ok to fail”. I think our only hope of this happening exists while democrats are in power.

There is no resolution process that can resolve cross-border institutions (see “13 Bankers” for detailed informations regarding that point).

What is really interesting the resolution process that the FDIC does currently with “ok to fail banks” is to nationalize it (place it in a conservatorship temporarily to peddle out the parts). Remember how much a backlash was stirred in ’08 when even the word “nationalization” was mentioned? That is another reason why a resolution would never work since Americans have such a deep distrust of anything that resembles the government stepping into the private sector.

So your response is like “Oh those poor babies were victums. Go after those that inabled them.

Per, don’t you recognize one should stop the run away car before you smack down the culprit that released the parking brake. If you have a lot of political will and resources, you could do both at the same time, but this administration doesn’t have a lot of political will and resources. The Republicans are fighting tooth and nail every small proposal the administration makes. Without one of them crossing the divide in the Senate, you are going to get mush. And it will probably take more than one because Democrats are culprits as well.

These bankers should be taught a lesson. Break up the banks. Bring back Glass Steagal. Fine them, prosecute them, send them to prison.

When your only meaning in life is to make more money, you are really screwed. Then it is only a matter of time before you have so much pressure on you from your boss, superiors, shareholders, etc. to provide a return that you jump the fence and go and behave in a way that you shouldn’t.

With all the scandals; Greek debt, the french dude with the CDO scam with Mr. Paulson, converting to a bank holding company (to get access to the Fed’s discoiunt window), well that firm should defnitely be broken up. No one, except the employees with their big bonuses, will miss Goldman Sachs. They act as if they had some God given right to manipulate their way into profit. That’s another reason why there is so much hatred towards Wall St.

And I can only imagine what kind of scams they have come up with in the past, but that still have not surfaced, in the press at least.

Re @ mikel….The only problem I have with their thesis is the past? I’m wholly in favor with the concept but the fix worries me. I believe that we will be playing into the big banks hands. Look at the monopolies? There is nothing different here,except everything? Standard Oil,and Ma Bell breakups have done nothing to help the consumer,and isn’t that what it’s all about. Just more questions than answers,or birds in the flock too create more dybbuk.

Hi – this is off this topic but it’s something (mostly in videos) that I’ve seen Simon and James say several times recently.

The top 6 US banks currently have assets (loans) worth 60% of US GDP. If you take the top 6 banks in 1995 they had assets worth 15% of US GDP.

So I was thinking about this. I’m not sure one should measure big banks assets against GDP. What if we measure it against total indebtedness of the US economy. My rule-of-thumb for total indebtedness is 350% of GDP (a number rather larger than GDP).

I do my calculations in emacs lisp (I’m a programmer) where what’s used is prefix (as opposed to infix) notation. Here are my calculations:

(* 14.0 .60)
8.4

(/ 8.4 (* 14.0 3.5))
0.17142857142857143

So this rounds US GDP to $14 trln. 60% of that is $8.4 trln. And then divide 8.4 into 14.0 * 3.5 (350%).

And you get 17%.

I’m sorry: this may be construed as arguing against TBTF. And I believe that today’s top 6 have way too much market power.

I’ve done quantification of things of this kind for a long time and I always like to look at how the numbers are constructed; what the assumptions are; and then play around with recasting the numbers in different ways.

Your post makes sense to me.. I’m no finance expert but I’ve been reading voraciously since 2007 and what I retain is that the creation of money has been functioning in reverse of classic money theory. (I read a comment about that here somewhere not long ago).

Intead of fractional lending where the Central Bank issues the “original money”, the GSs and JPMorgans of the World have been issuing uncollaterlized “insurance” policies that depend on never being claimed. When comes the time to unwind the house of cards it becomes clear that the money only exists on paper and the only solution is for the Central Banks to issue the money that can prop up the system and thus make the real money supply catch up to the fictional one along with the inflation that ultimately will come with it once that money starts to circulate in the real economy.

For the past 20 years or so the Bankers of the Universe kept inflation out of the CPI opting to innovate ways to loan mountains of cash into existence on the back of toxic mortgages and have it chase after too few stocks from one asset class to another. And when that wasn’t enough they innovated new and opaque ways to inflate fantom CDS markets based on this idea that you can ensure any imaginable transaction against loses… And these people think of themselves as smart?

Is it wrong to think of this as a Bubble that is filled with nothing but hot air…or maybe pus would be a better analogy? Is there no way to lance this boil without devastating the real economy? Your proposal to give the banks time to unwind their secret relationships sounds realistic enough to me.. But does it allow people to keep their homes, or at least those that can afford to continue their mortgage payments based on the reduced value of their homes to stay? Prices go up and down.. Why is it such a shock to economists that Economies as a whole should follow the same laws of economic gravity? Why not have deflation targets and control the deflation of the bubble instead of waiting for a rupture?

I don’t understand this willingness to throw consumers out on the street and to feed a downward spiral of foreclosures and destroyed neighbourhoods when these are the very people that the real economy needs to stay afloat. It just all seems so blatantly stupid. The best hope the U.S. has to get out of this mess is commercialising the exploration of Space..the Final Frontier… Given that the Universe is apparently going to expand forever growth economics should feel right at home.

I just have some trouble with the idea of regulating the size of a business. There are numerous unaddressed issues such as what happens when a bank hits the wall? Can a business function absent growth? Of course, who creates the next bank? Do we go so far as to limit shareholders from taking positions in more than one bank?

We can and should remove private money from the political process. Such will require legislating recent SCOTUS decisions irrelevant; but hey, that’s the fun part.

This is an opportunistic time for Israel to make a dash at Iran? I’m no cassandra,but I’m good at the future,and what I see is Israel in a few months bombing Iran,and pulling the good ole US of A into another World War,…? Call me whatever (I give up no food for thought?),…but – its diversion time? PS. Iran has done nothing in my opinion,..but the war-mongers have been drumming up theories to the n’th degree justifing an evasion. This parallels the WMD debacle with Iraq,and yes,..it’s gonna happen! Poof,…Goldman Sachs settles out of court with no guilty plea,and all is hunky-dory in the civilized universe except for the poor Iranian people? This is how democracies work? Thanks …”Keep up the Good Digging for America’s Sake”

I Would love to have you in our class imparting your thoughts and wisdom during one of our many lectures.

Your able to articulate your thoughts with precision and this is appreciated at great lengths from one developing thoughts from the likes of James Kwak, Simon Johnson, and a host of other notable minds of academia.

Look forward to many of your future forays and banter as you continue to grace this bloggers domain.

The notion of trust in an environment satiated with power and greed is downright silly. You trust them when you have them in tow. At every stage of our history this has come up and the answer, the one that assured us of further prosperity, was the same: corporate profit has to be yoked to societal need, not the other way around. Break them down, now.

Per,
There is enough guilt for everyone to have as much as they can handle.

However moving our attention to another party does not detract from the bad behavior of GS and Paulson. Let us keep our focus on a problem area that originated the trap mechanism until that piece is solved otherwise the chattering folk dance around to little effect.

GS built (for GS profit) the trap and artfully concealed same. Paulson in the midst of a dog-eat-dog world was supposedly more skillful and made about $1,000,000,000.

Unregulated derivatives give ‘law of the jungle’ similar if you or I, unarmed and ill-informed, were to be stalked by lions in the African night. No Pers this is not the world we should be enabling.

I am not an economist. Watching the recent discussions and explanation of derivatives, I think an explanation that a lay-person can understand is still missing and it may be why more people are not outraged. Yes, people are mad at the banks but probably because they think the banks made bad bets that did not turn out and we had to bail them out – something like a teenager being careless and crashing the family car.

The recent news is that the banks did not make a bad bet that did not turn out – they designed a bad and did not tell the other party taking the bet.

As I said, I am not an economist but this sounds like a point-shaving scheme: a player fixes a game in which he plays so that he and a few others make a lot of money. This is something that most people can understand.

“I am not an economist. Watching the recent discussions and explanation of derivatives, I think an explanation that a lay-person can understand is still missing and it may be why more people are not outraged…”

Magic

“The study of close-up magic is a good introduction to misdirection. Misdirection takes advantage of the limits of the human mind in order to give the wrong picture and memory. The mind can concentrate on only one thing at a time. The magician uses this to manipulate the “victim’s” idea of how the world is supposed to be.

Misdirection in magic may be as simple as a magician rolling up his sleeves and saying “nothing up my sleeve” and then producing an object that could never have been “up his sleeve”. The audience instinctively scrutinizes the magician’s arms, but ignores the actual location where the object-to-be-magically-produced is hidden.

Attention can be controlled in various ways. A magician will first grab attention with a coin, or another small and shiny object A shiny object captures more attention and seems less likely to disappear or to be manipulated. Then attention is directed away from the object (hence, “misdirection”) through a combination of comedy, sleight of hand or an unimportant object of focus, thus providing just enough time for the magician to do whatever he or she wishes to do with the original object.

One of the most important things to remember when thinking about misdirection and magic is this: a larger movement conceals a smaller movement.”

“I’ve done quantification of things of this kind for a long time and I always like to look at how the numbers are constructed; what the assumptions are; and then play around with recasting the numbers in different ways.”

April 19, 2010 – boingboing.net

The Capital Markets Subcommittee Chair, Rep. Paul Kanjorski of Pennsylvania, tells C-Span how the world economy almost collapsed in a matter of hours.

“At 2 minutes, 20 seconds into this C-Span video clip, Kanjorski reports on a “tremendous draw-down of money market accounts in the United States, to the tune of $550 billion dollars.” According to Kanjorski, this electronic transfer occured over the period of an hour or two.

Kanjorski: “The Treasury opened its window to help. They pumped a hundred and five billion dollars into the system and quickly realized that they could not stem the tide. We were having an electronic run on the banks. They decided to close the operation, close down the money accounts, and announce a guarantee of $250,000 per account so there wouldn’t be further panic and there. And that’s what actually happened. If they had not done that their estimation was that by two o’clock that afternoon, five-and-a-half trillion dollars would have been drawn out of the money market system of the United States, would have collapsed the entire economy of the United States, and within 24 hours the world economy would have collapsed.”

“It would have been the end of our political system and our economic systems as we know it.”

Notabanker, I cannot understand why you might think of me as one enabler of that world.

Much the contrary since 1997, often in much loneliness, I have been writing about the need for our financial system to serve a societal purpose… but also that the system might work better without the misguided interference of the current regulators with their risk adverse agenda.

And I do not want our regulators (and when I say our regulators I refer to global regulators in the Basel Committee) to hide behind this Goldman Sachs’s misbehaving. You see for me “the trap mechanism” is not the derivatives, they might be quite useful, but the fact that banks are given special capital requirement incentives to invest in these instead of lending to their clients.

Why did IKB which traditionally was lending to their German small businesses and entrepreneurs even contemplate to invest in an ABACUS 2007-AC1? In exactly the same way that question applies to German banks it applies to US banks. Since we are talking about global bank regulations!

Truth-telling! I always wondered what Paulson saw that sent him to Pelosi on bended knee. It had to be a bank run. Geitner said so last month in the New Yorker but this quantifies it. So Dimon may be right -if they start running electronically again what will they prevent collapse.

Per,
Unfortunately we will not find a ‘just’ and ‘humane’ society on this earth. 2000 years ago a solution was delivered and made available to all.

Your question re IKB:
Why did IKB which traditionally was lending to their German small businesses and entrepreneurs even contemplate to invest in an ABACUS 2007-AC1? I can only suspect greed caused caveat emptor to be overlooked!

My friend, I don’t accuse you and realize that:
1. I am one of the lemmings.
2. So many amoral gamers think nothing is wrong as they trap the lemmings.
3. So many greedy lemmings ignore danger.
4. Regulators are ineffective through either poor regulations, incompetence, laziness/fear or dishonesty.

I do not know what will fix things and suspect we will be unable to successfully regulate. What to do? Well improve regulation effectiveness (regulations and regulators) is a standout yes. I suspect that the gamers will always outfox the regulators so maybe we should also govern by outcomes? That is ‘if this is the outcome then the tactics used are invalid and results are to be rolled back’. I don’t have a solution but think of road rules, full disclosure, all transactions via exchanges, other transactions contractual but unenforceable at law. Also a set of agreed moral/ethical imperatives as a base upon which all rules stand. No legal challenge to be successful if this rules base is contravened. Most of the technical corrections spoken of on this site are implicit subsets of such a coda.

Pers people like you are probably the architects of the solution. However I will not hold my breath while people of good intent build such a trading environment. Villains will continue to run amok while the talkers talk.

I haven’t read all the comments. I come here for very interesting and enlighting information by passionate people I have little to offer. However, I am at times negatively impressed or, at least, discouraged by those who seem to countenance what has happened because they believe these characters (the Paulsons – both of them; Goldman and others) are only doing what the laws and rules of the game allow. It is all so civil. And we must be civil and respect the legalities of it all in response.

Really, it isn’t civil. It has all been gamed by the monied interests A tangled web of rules and legislation has been weaved to allow the most gain by the least ethical. And once found out, their penalties will be slight compared to their gain.

I don’t care about the rules. When bullies make the rules, the rules seem less important to me than the consequences for the bullying. Do we have any expectation that the bullying will stop? Ever?

We’ve been through the savings and loan debacle in my middle lifetime. We’ve seen gas prices go to $4-$5 a gallon because of speculation. We’ve seen high unemployment and people forced out of their homes while bankers get bonuses.

When is it going to stop? And what will it take? I would have thought a very strong leader but we don’t have that either.

When is it going to stop?

BTW, I was listening to a radio program – I won’t say which one because this site doesn’t argue radio hosts, thank goodness. But, the point was made that Bush said outright that the tax payers would bail out the banks while Obama has said that the tax payers will help but will get their money back with interest.

The problem with that is that I don’t want my money back with interest if the choice is making the bankers richer. Put the money into main street and help my fellow Americans. If the money were used for that, I wouldn’t care if I got it back. But I’m damned if I want to see tax payer money go to making bankers richer and never trickle down to those of us in need. When I look at it that way, there’s really no difference between Bush and Obama. I’m sorry to say.

Sorry for the long post. I’m really feeling this. It hurts to see so many people living in misery and unpredictability. At my very core, I am incensed.

Damn him. That lady doesn’t want information. She wants and needs help. For families like hers, she could care less what happens to the American economy. We’ve struggled before and those of in the bottom half will make do like we always do. And perhaps some new ways of thinking might emerge. We should nationalize energy anyway. It is time. Except for the babies who have been suckled on rich portfolios handed down by their Mayflower ancestors, the American people would benefit. We need a new economy anyway.

Sound a little bitter? Well I am. But I also believe that Americans are creative and robust and have the resources and know-how to survive.

The beauty of this action of SEC against Goldman Sachs is that it allows us to understand a lot of what happened all over the market. Let us see it for example from the perspective of IKB the German Bank who invested $150 million in ABACUS 2007-AC1.

From paragraph 58 we read that IKB bought $50 million of the A1 tranche paying Libor plus 85 basis points, and $100 million of the A-2 tranche paying Libor plus 110 basis points. The average return comes to about 102 basis points.

Since these $150 million were rated Aaa by Moody’s and AAA by S&P when purchased, that meant that IKB’s investment, for bank capital requirement purposes, would be weighted at only 20% signifying only $30 million for which 8% capital requirements had to be held. IKB would therefore need $2.4 million of their own capital to back the operation, a leverage of 62.5 to 1.

$150 million at 102 basis points and $ 2.4 million in capital signifies then an expected gross return of 63.75% on IKB’s capital.

In order for IKB to make a comparable return when lending to their traditional client base of small and medium sized businesses, most certainly unrated, and who therefore are risk weighted at 100%, IKB would have to lend them the funds at Libor plus 510 basis points.

And here we have it, the way the current capital requirements for banks are based on the risks perceived by the credit rating agencies, provide huge incentives for the banks to enter into the virtual world and invest in these “synthetic” operations, instead of lending to the real world… and, that problem is so much larger than a simple lover’s spat between Goldman Sachs, Paulson and “sophisticated investors”.

Do you understand why I beg of you to keep your eyes on the ball? Does this issue not merit an independent post by Simon and James?

As you said, and I agree: “Dimon’s points are valid, given our financial structure – this is exactly what makes him so very dangerous. Our biggest banks, in effect, have become too big to be held accountable before the law.”

I say, damn the torpedoes, full speed ahead. So what if it threatens the world economy, so what if it destabilizes things, so what if they all fall, like so many dominoes. Yes, it would be tough, but with what StstsGuy pointed out earlier, we are not seeing a recovery happening, except on Wall Street. It could get really bad for a while, but, we would then recover, find others to do what Wall Street investment banks and bankers did for years, the right way, and the best and brightest would leave the TBTF’s (or stop dreaming of going there) and make many wonderful and REAL economic contributions to our society. The question is, do we want a lingering death, or a quick death and long rebirth. I vote for the latter.

Joannie, I feel your pain. Amen. I have been watching this unfold, and yes, it has happened before, several times. Perhaps the Goldman suit will open the floodgates for many more, and I want criminal investigations as well. These TBTF’s are just as evil and Madoff, but think that their fecal material doesn’t have a negative aroma. It does, and they do. Wall Street is an ethical sewer. Moses, where are you, when our fellow American oligarchs are prancing around their golden calf.

Snark and commies aside, of course there are limits to fiduciary duty.

A fiduciary owes duties to a limited set of people (e.g. your lawyer owes you a duty but does not necessarily owe a similar duty to your neighbor) and there are limits on what the duty itself entails. For instance, GS does not have to threaten kamikaze attacks in order to squeeze out an extra ten basis points for its clients.

The too big to fail problem has two facets; the systemic economic importance they have and the political influence they wield. The first can be handled through financial regulatory reform, the other requires you to dig much much deeper.

These two links demonstrtare conclusively that the corporate logic of acceptable evil is not the backbone of the American Economy, and that there is a coherent and vital force of Americans who resent this sell out of America as business’ bottom line…winner take all. These guys have been around forever and are the cancer of humanity.
Read these links, send them to friends.

When we were protesting against our bloody (human & financial) involvement in Viet Nam, we made the tactical marketing mistake of waving the Viet Cong flag in the streets. Let’s remember this time to wave the American flag while we take back our government from Wall Street.

Flags are not the problem, Ed. We must move away from syjmbols and take action. Right now, the flag appears to have dollars signs where the stars should be. Wave the flag when you can be proud of your country again.

Shareholder responsibilities are the attributes of being a good financial shopper. They are primarily a function of pricing and practice metrics to ensure that investors are not being overcharged and/or not being misled. Stockholder rights are regulatory commands. You need to qualify the noise traders, otherwise shareholder rights that are disproportionate to shareholder responsibilities create free-riding subsidies that result in exploitive market inefficiencies.

If the issue were trust, then so long as Bernie Madoff didn’t have liquidity problems he should have been judged to be respectable, right? Are these guys enriching themselves because the taxpayers practically made them impervious to risk? That is the question. That is an asymmetrical benefit that has nothing to do with free enterprise. If the government should stay out of it then they should leave rules in place by which the game can be played without taxpayers picking up the peaces before leaving the room. If someone can say how that occurs without breaking up the banks, I’m all ears.

If there is complexity, there is uncertainty. To achieve real regulatory reform, policymakers have to move beyond risk management to randomness governance of both determinate and indeterminate underlying economic conditions. Trying to govern both risk and uncertainty with the legacy, one-size-fits-all deterministic regime is analogous to having one set of driving instructions for both the U.S. and U.K. The result is larger and more frequent boom-bust cycles.

You do not have the expertise to support the claims you are making about obeying the law or fraud at the heart of wall street. The difference between your economic specialty and real world financial transactions is like the difference between a calculus professor and someone building a highway. You have no expertise in law and none in the specific areas of the SEC suit. You have made no effort to analyze the evidence, but simply assumed the conclusion you want to reach. For those who do have the expertise and have looked at the papers, the lawsuit is a travesty. It is not even close to a viable suit.

Absolutely right, and that was one of my concerns that I unfortunately did not find how to voice in an effective manner. In 2000 I wrote: http://bit.ly/HIi3x

“The risk of regulation. In the past there were many countries and many forms of regulation. Today, norms and regulation are haughtily put into place that transcend borders and are applicable worldwide without considering that the after effects of any mistake could be explosive.”

Ah. “Non-linear dynamics”. Now I have a much better sense of where you’re coming from.

Have you read Mandelbrot’s _The Misbehavior of Finance_?

None of which helps me with the particular numbers I’m interested in, but that’s OK. I’ll arrive at my own conclusions. There are actually many interesting cases where non-linear dynamics are not needed at all.

One of the more popular analogies to describe the alleged fraud, this is how the Guardian’s Richard Adams put it:

“The analogy would be a broker who arranged for fire insurance to be sold to an arsonist by misrepresenting the arsonist as a member of the fire brigade – and then sold him matches and a can of petrol.”

I am presently in litigation with Fremont Reorganizing, Goldman Sachs dba Litton Loan Servicing, et al., (2 different cases) for about 2 years now. The main issue with the complaint is a fraudulent loan originated by Fremont in June 2006. This in turn produced an array of other
issues: unsigned deed of trust, over billing issues, lost payments, excessive balloon payment, back dated assignments, illegal non-judicial foreclosure documentation, missing documentation, illegally reporting to my credit, falsifying declarations, 6 week TRO’s, court procedures not followed, judges wait until the courtroom is cleared to rule against a TRO (both times); retired (78 year old) judge ruled against a seated judges TRO where the retired judge took 30 minutes to read a 300 page brief. The whole time they have been ignoring my request and failing to give me the required documentation so that I can rescind the loan. Goldman Sachs dba Litton Loan Servicing has been aggressively trying to foreclose on my property. I believe to cash out for insurance reasons. (It’s over a million dollar loan) I have invested over $400,000 into this property for the past 5 years and if I had known about this mortgage meltdown game played by Wall Street I would have never proceeded with this Real Estate transaction. The Media and the Government has not once addressed or helped the borrower, namely me, who also has been damaged by these defaulted CDO’s.

A Time line of what’s going on with Goldman Sachs to show how they are scheming to pursue foreclosures for the insurance by acquiring distressed, shelled fraudulent companies which will eventually or haven’t already gone BK…

Note: My wife is pursuing individuals who are interested in joining her in a class action lawsuit with regards to violation of her community property rights in a wrongful foreclosure. If you are in a community property state and a spouse is not on title you may have grounds for legal action.

To illustrate the problem to be tackled by Per and Notabanker consider the Treasury’s financial regulatory reform proposed legislative, regulatory, and administrative reforms to promote transparency, simplicity, fairness, accountability, and access in the market for consumer financial products and services as referenced in pages 111-112 of “We’re All Screwed: How Toxic Regulation Will Crush the Free Market System”

Simplicity you say. Try reading part of the definition for the principle of “liquidity” for determining capital adequacy of TBTF financial institutions. It is the Net Capital Rule’s undue concentration haircut provision SEC rule 15c3-1, subparagraph (c)(2)(vi)(M(1). The provision states that in case of:

“money market instruments, or securities of a single class or series of an issuer, including any option written, endorsed, or held to purchase or sell securities of such a single class or series of an issuer (other than “exempted securities and redeemable securities of and of an investment company registered pursuant to the investment Company act of 1940), and securities underwritten (in which case the deduction provided for herein shall be applied after 11 business days), which are long or short in the proprietary or other accounts of the broker or dealer, including securities that are collateral to secured demand notes defined in Appendix D, 240.15c3-1d, and that have a market value of more than 10 percent of the “net capital” of the broker or dealer before the application of paragraph (c)(2)(vi) of this section or Appendix A, 240.15c3-1a, there shall be an additional deduction from net worth and/or the Collateral Value for the securities collateralizing a secured demand note defined in Appendix D, equal to 50 percent of the percentage deduction otherwise provided by this paragraph (c)(2)(vi) of this section or appendix A., on that portion of the securities position in excess of 10 percent of the net capital of the broker or dealer before the application of paragraph (c)(2)(vi) of this section and Appendix A. In the case of the securities described in paragraph (c)(2)(vi)(J) the additional deduction required by this paragraph shall be 15 percent.”

Note over 200 words for one sentence. What is even worse is that as a junior research analyst in the NASD’s (now part of the Financial Industry Regulatory Authority “FINRA”) Department of Regulatory Policy and Procedures, I worked on the proposal that brought forth this piece of financial Shakespeare. The people who were party to the discussion were very knowledgeable regulators. They were smart and experienced, but we spoke a language unto ourselves. Translating industry jargon into Readers’ Digest simplicity is a monumental task. The “licensed” have a vested interest in preserving the status quo.

To be fair, the likelihood of an undue-concentration haircut question on the Series 27 examination is somewhat remote, but SEC Rule 15c3-1, the Net Capital Rule, is justifiably an integral portion of the examination. Financial Industry Regulatory Authority (FINRA) is the largest independent regulator for entities doing business in the United States. All told, FINRA oversees nearly 4,900 brokerage firms, about 173,000 branch offices and approximately 651,000 registered securities representatives. The challenge of governing this complex body is enormous.

That is why I argue that the first step in reform is to structurally segment randomness governance in terms of predictable, probabilistic, and uncertain regimes to better-correlate information.